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The Jobs Market Buzzkill

That’s how the Financial Times described the October jobs data. Last Friday’s report showed that nonfarm payrolls rose 271k in the month, the best result this year and 50% more than forecast. Hourly wages were up twice as much as expected. The Household survey showed that the increase in the number of employed was the second strongest reading in the last twelve months and the unemployment rate dropped to five percent, half its peak, and down at a seven-and-a-half year low. The market rightly saw the data as signaling thumbs up for the long awaited Fed rate hike.

But “top gear” – really? Maybe the FT writer owns a VW diesel. Despite the beat last month, the labor market just doesn’t accelerate like it should; and can you hear that noise when it turns the corner? It just doesn’t sound right to me…

The point is not to say that the October data wasn’t good, or that it does not help the case for a rate hike; it was, and it does. But if this is top gear, then check the software, because something is not right.

Nonfarm payrolls rose 271k in October; the biggest increase in 2015. But last year there were four months with larger gains; the top two in 2013 were more than forty thousand bigger than the latest result; 2012 had two months with more job gains; and if the October number ends up being this year’s high water mark, it would be the lowest for any calendar year since 2009.

In October, the average hourly wage monthly growth rate was +0.4%, twice the forecast. The monthly gain put the annualized wage growth rate for production and nonsupervisory workers, a group that makes up 80% of the workforce – at +2.2%, strongest gain in 2015. The annualized figure is moving in the right direction; it was down at +1.7% in February. But the current annualized rate is lower than all but one month from last year, and it is lower than 88% of the months in the last fifty years.

The Household Survey showed that the number of employed increased 320k in October; the second largest gain of the year. But when you look under the hood on this number, you can see the need for a tune-up.

In October, employment for those aged 55 and older rose 378k, but the number of employed people aged 25 to 54 years fell 35k. It is not the first time this has happened; the dichotomy between the numbers employed in these age groups is becoming an old story. Since the eve of the recession in December 2007 the employed in the 55+ group has risen 7.5 million. At the same time, the number of employed aged 25 to 54 years has fallen 3.7 million. That is a 28% increase in the number of employed old folks, and a 3.7% decline from the key working age demographic.

Now be careful with this data, because for many of those millions of workers, it was simply a matter of aging up and away into the fifty-five and over group; the baby boomer bulge leaves a mark wherever it treads. But that is not the whole thing. The labor force participation rate for the 55+ group is a point higher now than it was at the end of 2007, it’s at 39.8%. But the participation rate for the 25 to 54 group is down 2.4 points from then to now – it’s currently at 80.7%.

The decline in the participation rate of the meat and potatoes of the American workforce account for at least a couple million women and men in their prime working years who are no longer working, nor are they looking for a job. Why is that?

Interestingly, this is an American workforce phenomena; not even a G7 trend, just in the US, says the FT columnist Martin Wolf in a recent piece called America’s Labour Market is Not Working.

In 2014, 12 per cent—close to one in eight—of US men between the ages of 25 and 54 were neither in work nor looking for it. This was very close to the Italian ration and far higher than in other members of the group of seven leading high-income countries: in the UK, it was eight percent; in Germany and France seven percent; and in Japan a mere four percent.

The decline in the US unemployment rate has been good when it is compared to its G7 counterparts, but the participation rate is a different story, explains FT’s Martin Wolf:

US cyclical unemployment performance has at least been decent by the standards of its peers, then. Yet as the 2015 Economic Report of the President notes, the UK experienced no decline in labour-force participation after the Great Recession, despite similar ageing trends to those in the US. Even on a cyclical basis, the decline in participation in the US is a concern. It is, however, the longer term trends that must be most worrying. This is particularly true for the prime-aged adults.

Back in 1991, the proportion of US prime-age men who were neither in work nor looking for it was just 7 per cent. Thus the proportion of vanished would-be-workers has risen by 5 percentage points since then. In the UK, the proportion of prime-aged men out of the labour force has fallen only from 6 per cent to 8 per cent over this period. In France, it has gone from 5 to 7 per cent. So supposedly sclerotic French labour markets have done a better job of keeping prime-aged males in the labour force than flexible US ones. Moreover, male participation rates have been declining in the US since shortly after the second world war.

What has been happening to participation of prime-aged women is no less striking. In the US, female labour force participation rose strongly until 2000, when it was among the leaders. The US is the only G7 country to experience a sustained decline in the participation rate for prime-aged females since then. Japan, once far behind, has caught up.

The reason for the ongoing longer term decline in the participation rate of 25 to 54 year old workers is not easy to understand. Martin Wolf suggests a couple of possibilities; the difficulty of finding affordable child care and employers substituting younger and older workers for the prime-age group in order to keep wages down. Maybe we can blame R2D2 and C-3PO as well…sort of.

“Robots will take over 45 per cent of all jobs in manufacturing and shave $9 trillion off labour costs within a decade, leaving great swathes of the global society on the historical scrap heap,”writes Ambrose Evans-Pritchard in the UK Telegraph. “In a sweeping 300-page report, Bank of America predicts that robots and other forms of artificial intelligence will transform the world beyond recognition as soon as 2025, shattering old business models in a whirlwind of ‘creative disruption’, with transformation effects ultimately amounting to $30 trillion or more each year.” Evans-Pritchard notes that in the last fifty years the proportion of those in the US aged 25 to 54 who are not working has tripled, and wonders if a chronic effect of robotics on the workers has already taken hold. “The price of an advance robotic welder fell from $182,000 in 2005 to $133,000 last year, and its sophistication is increasing all the time.

The standard Baxter collaborative ‘cobot’ that works side by side with people on the factory floor-fixing bolts on a conveyor belt, for example—costs just $22,000. We are coming close to the crucial ‘inflexion point’ when it is 15 per cent cheaper to use robot than to employ a human worker. This threshold has already been crossed in the American, European and Japanese car industries, where it costs $8 an hour to employ a robot for spot welding, compared to $25 for a worker. Hence the eerie post-human feel of the most up-to-date car plants. ‘We are facing a paradigm shift, which will changed the way we live and work,’ said the report’s author, Beijia Ma. The social effect is to squeeze out those at the bottom of the employment ladder, rendering them almost unemployable without re-education. Bank of America describes this as the ‘displacement of human labour’, estimating that almost half of US jobs could be at risk.”

Now the title is easy to understand: I am the buzzkill.

How else can you explain such a downbeat article about the labor market, on the heels of better than expected data? I just figured the jobs report should be put in context, because it is not really…yeah, I know I’ve said enough already… I’ll just go and sit over in the corner, next to the potted plant…enjoy the data…

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